A Quick Guide to Capital Gains: Types, Calculation and Tax Implications
31 October, 2024
Synopsis
Capital gains are the profit made from selling an asset for more than its purchase price.
There are two types of capital gains: short-term capital gains (STCG) and long-term capital gains (LTCG).
The Indian Income Tax Act offers several exemptions under Sections 54, 54EC, 54F, 54B, 54D, 54EE, 54G and 54GA.
Capital gains are the profit you make from selling an asset for more than you paid for it. For instance, if you bought a piece of land for ₹10 lakh and sold it later for ₹15 lakh, the ₹5 lakh profit is your capital gain. Understanding capital gains is important because it can impact your financial planning and tax obligations. This article explains what are capital gains, their types and tax implications.
What are Capital Gains?
Capital gains are the earnings derived from selling a capital asset like bonds, stocks, mutual funds or real estate. To simplify it further, capital gains definition refers to the profit made when an investor sells an asset for a higher price than its purchase cost. Here, the profit earned by an investor is termed as capital gain.
Types of Capital Gains
Capital gains are broadly classified into two categories based on the holding period of the asset:
Short-Term Capital Gains (STCG): For securities listed on a recognised stock exchange, if the asset is held for 12 months or less before sale, the profit is considered short-term capital gain. For other assets like real estate, the holding period for short-term capital gains is 24 months or less.
Long-Term Capital Gains (LTCG): If the holding period exceeds 12 months for listed securities, the gains are classified as long-term capital gains. For real estate and other assets, the holding period must exceed 24 months to be considered long-term.
How to Calculate Capital Gains?
The computation of capital gains involves several steps, depending on whether the gain is short-term or long-term.
Short-Term Capital Gains Calculation:
Formula: STCG = (Full value consideration) - (cost of acquisition + cost of improvement + cost of transfer).Long-Term Capital Gains Calculation:
For listed securities, the calculation includes the benefit of indexation, which adjusts the purchase price for inflation.
Formula: LTCG = (Full value of consideration received or accruing) - (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Here:
Indexed Cost of Acquisition = (Cost of Acquisition) × (Cost Inflation Index in the year of sale or transfer/Cost Inflation Index in the year of purchase).
Indexed Cost of Improvement = (Cost of Improvement) × (Cost Inflation Index in the year of sale or transfer/Cost Inflation Index in the year the improvement was made).
Tax Implications on Capital Gains
The tax treatment of capital gains differs for short-term and long-term gains. It also varies based on the type of asset. Per Union Budget 2024-2025, the tax treatment for capital gains is as follows:
Short-Term Capital Gains Tax:
For listed securities, short-term capital gains are taxed at 20% when Securities Transaction Tax (STT) is applicable under Section 111A of the Income Tax Act. For other assets, short-term gains are added to your income. They are then taxed as per the applicable income tax slab.Long-Term Capital Gains Tax:
For listed securities, long-term capital gains exceeding ₹1.25 Lakh are taxed at 12.5% without the benefit of indexation under Section 112A. For other assets, long-term gains are taxed at 12.5% without the benefit of indexation. However, with the Budget 2024, the indexation benefits on long-term capital gains (LTCG) from property have been completely removed. This means that property owners can no longer adjust the acquisition or improvement costs for inflation when calculating LTCG.
Exemptions and Deductions on Capital Gains
You can take advantage of several exemptions provided by the Income Tax Act that reduce tax on capital gains.
Section 54: You can avoid tax on long-term capital gains from selling a residential property if you reinvest the gains in another residential property.
Section 54EC: You can get a tax exemption on long-term capital gains by investing the proceeds in specific bonds within six months of the sale.
Section 54F: You can get a tax exemption on long-term capital gains from selling any asset (other than a residential house) if you invest the entire sale amount in a residential house.
Section 54B: If you sell agricultural land that was used for farming for at least two years before the sale, you can claim an exemption. To qualify, you need to reinvest the capital gains in another agricultural land within two years.
Section 54D: When your land or buildings used for industrial purposes are compulsorily acquired, you can claim an exemption. To do so, reinvest the proceeds in new industrial assets within three years of the sale.
Section 54EE: You can avoid tax on capital gains from long-term assets by investing the gains in units of a specified fund. This must be done within six months of the sale, with a maximum investment limit of ₹50 lakh per financial year.
Section 54G: If you move an industrial undertaking from an urban area to a non-urban area, you can claim an exemption. Reinvest the gains in specified assets like land, buildings, or machinery within three years.
Section 54GA: Similar to Section 54G, you can claim an exemption on capital gains when shifting an industrial undertaking to a Special Economic Zone (SEZ). The reinvestment must be made in qualifying assets within three years to avail the exemption.
Manage Your Capital Gains Efficiently with HDFC Bank
Understanding capital gains and their tax implications is essential for investing in the securities market. By leveraging available exemptions, you can efficiently manage capital gains. For streamlined and efficient management of your investment portfolio, consider using an HDFC Bank Demat Account. HDFC Bank offers a range of benefits, including preferential pricing, a wide variety of securities to invest in and hassle-free movement of funds. Open an HDFC Bank Demat Account online.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
